Technology

Intel Results May Bode Well for Recovery

Third-quarter earnings from the world's top chipmaker added to optimism that the technology sector will help lead an economic rebound

Tech's recovery appears to be gathering steam. For the third straight quarter, computer chipmaker Intel Corp. (INTC) said demand for its products is improving. The company announced on Oct. 13 that third-quarter sales jumped 17%, to $9.4 billion, handily surpassing Wall Street expectations, as businesses and consumers around the world took advantage of falling prices to purchase new machines. Intel also predicted solid growth for the holiday shopping period.

Results for Santa Clara (Calif.)-based Intel are still below year-ago levels, but the numbers were a relief for investors who have grown increasingly optimistic about a recovery in sales of personal computers and servers. The Oct. 22 launch of Microsoft's (MSFT) next-generation Windows 7 operating system is expected to spur added buying sometime next year by corporate customers, including many that decided against upgrading to Vista, the previous iteration of Windows. The "results underscore that computing is essential to people's lives, proving the importance of technology innovation in leading an economic recovery," Intel Chief Executive Paul S. Otellini said during a conference call discussing the results.

Intel also reported surprisingly strong corporate demand for servers using its new Nehalem processors, and said business improved in all geographies. "They blew out everything," says Leslie Fiering, vice-president of Gartner Research (IT). "There wasn't any bad news there at all."

As the world's largest maker of chips that run computers, Intel is considered a bellwether of global demand for computers and other hardware. IBM (IBM), Advanced Micro Devices (AMD), Google (GOOG), and Microsoft are among other tech companies reporting earnings in the coming weeks.

Strength Mainly on Consumer Side

How much Intel's results presage full-blown recovery isn't clear. PC makers including Hewlett-Packard (HPQ) and Dell (DELL) have noted a pickup in consumer demand, especially for low-priced machines, but have not yet signaled a sustained rebound in corporate demand. "The strength of our business remains primarily consumer-driven," Otellini said.

In an effort to get a more accurate handle on overall global demand, Intel recently set up a system in which it holds inventories for PC makers in distribution centers until they are needed. Otellini said PC inventories remain relatively lean, a sign computer makers are seeing greater-than-expected demand for new machines.

Researcher iSuppli projects that global shipments of PCs and servers in the third quarter rose 9.8% from the second quarter, to 73.8 million units.

For the three months ended in September, Intel reported net income fell to $1.86 billion, or 33¢ a share, from $2 billion, or 35¢ a share, a year earlier. The results exclude a charge Intel took to pay a fine levied by European antitrust officials. Analysts expected income of 28¢ a share.

Robust Netbook Chip Sales

Sales of Intel's Atom chip have benefited from continued strong demand for low-cost netbooks, but Otellini said mainstream notebooks also appear to be selling well. Intel reported margins on its products rose to 58%, well above its earlier prediction of about 53%. Through the rest of the year, the chipmaker predicted margins will widen to 62%.

Though there are continuing concerns that the popularity of netbooks will hurt the industry by accelerating a decline in average PC selling prices, Intel appears to be benefiting. Intel Chief Financial Officer Stacey Smith said Atom chip sales rose 15% from the second quarter, to $415 million. Analysts attribute the gains in part to efficient, well-proven manufacturing methods.

Intel reported that overall Mobility Group revenue rose 19%, while sales in the corporate-focused Digital Enterprise Group rose 14%.

The company is pushing full speed ahead with efforts to build even tinier chips. A revision of its manufacturing technology will enable Intel to crank out chips with features measuring 32 nanometers in size, a leap from its previous generation of 45-nanometer technology.